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Johannesburg – Deteriorating profitability and asset risks will continue to add pressure on insurers' creditworthiness, said ratings agency Moody’s which assigned a negative outlook to the industry.
According to a report issued by the ratings agency this week, the creditworthiness of the insurance sector is expected to remain under pressure for the next 12 to 18 months.
"Our negative outlook for South Africa's insurance sector reflects the challenging operating conditions, which create headwinds for insurers' profitability and increase their asset risk," said Brandan Holmes, vice president and senior analyst at Moody’s.
"Low economic growth will weaken insurers' profitability through lower new business volume and pressure on persistency".
Fundamentals of the insurance sector’s credit risk which are asset quality, capitalisation, profitability and financial flexibility are linked to the economic and market conditions of the country.
The insurance sector also has investment exposure to local banks and the sovereign, which raises its asset risk. “For this reason the negative outlook for the government of South Africa is also a key driver of our outlook for insurers,” the report read.
The reduced investor and consumer confidence would contribute to “sluggish” economic growth, which will add pressure to new business volumes of insurers, Moody’s explained. This is particularly true for discretionary savings and investment products.
This will reduce fee income and profit margins. “In addition, the challenging operating conditions increase the risk of increased lapse rates, which would occur if reduced discretionary income forces consumers to stop paying insurance and savings premiums,” according to the report.
Moody’s noted that South African insurers are well capitalised on a regulatory and economic basis, and are resilient to a range of stress scenarios. “Their solid capitalisation, together with the strong market positions of the leading insurers place them in a good position to navigate the challenging environment.”
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